Non-residential construction at 'very high levels'

A major bank has said that there are suggestions of a “shift in fundamentals in the property market” after non-residential construction rose to its strongest levels in recent months, while conditions “deteriorated” in residential construction.

According to the NAB Quarterly Business Survey for the September quarter 2016, business conditions for the construction industry were relatively steady overall, but there were some “fairly significant deviations” within sub-industries.

In non-residential construction, such as commercial and office projects, conditions “jumped to very high levels in Q3 2016” – with business conditions now just over 40, while conditions “deteriorated” in residential construction, “suggesting a shift in fundamentals in the property market”.

The survey warned that concerns around a potential oversupply of housing are “weighing on confidence” for residential construction firms, while construction services has turned negative.

Further, the survey found that capacity utilisation (the measure of the extent to which the productive capacity of a business is being used) fell from 81.9 per cent in the second quarter to 81.1 per cent in the third. Although the bank found that this “unwound the solid gains seen in the previous two quarters”, it is still marginally above the long-run average level of 80.6 per cent.

NAB Group’s chief economist Alan Oster added, “Capacity utilisation took a step back, unwinding the gains from recent quarters, although the longer term trend is still very much a positive one. That is helping to support investment and employment intentions shown by firms. We have even started to see some signs that firms are finding it a little harder to obtain suitable labour, which could translate into stronger wages growth down the road.”

Overall, the quarterly survey found that there was a slight moderation in business conditions in the September quarter, falling four points to +7 index points, driven by a drop in trading conditions and profitability.

However, Mr Oster said that “business conditions are still well above long-run average levels and are consistent with solid rates of activity in the non-mining economy right now”.

NAB added that confidence levels also improved slightly, rising from +3 in the last quarter to +5 in the quarter ending September 2016, which suggests that firms “are still reasonably comfortable about their operating environment, even with the numerous uncertainties emanating from overseas”.

Mr Oster said that the near-term outlook “is still a good one”, as businesses “don’t anticipate any clear deterioration in business conditions over the next 3-12 months, while hiring intentions for the next year actually picked up markedly and capital expenditure plans remain much stronger than what some other indicators might suggest”.

Firms told the survey they expected both their own prices and labour cost growth to remain relatively subdued in the coming quarter.

According to Mr Oster, the outlook for business activity in this survey should therefore “make the RBA reasonably comfortable”, and added that “in light of recent housing market trends”, another rate cut this year is “unlikely”, barring an extremely weak outcome in the third quarter report of the Consumer Price Index.